New York Appeals Court Agrees With Ohio – Construction Disputes Belong In The State Where The Project Is Located

Posted on January 08, 2016

In August, in an article entitled, “Ohio Court Ruling Keeps Construction Disputes Where They Belong – In Ohio” this blog discussed the contract mechanism known as a forum selection clause, by which the parties to an agreement stipulate that any dispute arising under the contract will be litigated in a specific jurisdiction or court. As examined in that article, the most common reason for the inclusion of a forum selection clause in a contract is so that the more powerful contracting party – by insisting on the selection of a distant forum – can make litigation so expensive or difficult that it would be impossible for the weaker party to succeed on even the most meritorious claim. Generally speaking, forum selection clauses are valid and enforceable in most business contracts, however, this acceptance does not extend to construction contract disputes under Ohio or, apparently, New York law.

In Ohio, the Fairness in Contracting Act (“Act”), codified at Ohio Revised Code Section 4113.62, states that “Any provision of a construction contract***that requires any litigation, arbitration, or other dispute resolution process provided for in the construction contract, subcontract, agreement, or understanding to occur in another state is void and unenforceable as against public policy.” As discussed in a case considered by Ohio’s 7th District Court of Appeals, Michels Corp. v. Rockies Express Pipeline, L.L.C., 2015-Ohio-2218, this means that legal disputes over construction projects located in Ohio must be litigated in Ohio courts.

A recent case decided by the New York Supreme Court of Rockland County, HVS, LLC v Fortney & Weygandt, Inc., demonstrates that the State of New York holds a similar view to that of Ohio on the appropriate forum for resolution of construction disputes. In HVS, the plaintiff electrical contracting company, HVS, LLC, entered into a written subcontract agreement with the defendant Fortney & Weygandt, Inc. (F&W), wherein HVS agreed to perform the electrical scope of work for the construction of a CVS Pharmacy located in Bardonia, New York. Delays in the project caused F&W to seek a change to the project schedule and, following a dispute about the revised work schedule, F&W terminated HVS’s subcontract.

HVS filed a mechanic’s lien and commenced suit against F&W for breach of contract and foreclosure of the lien. F&W filed a demand for arbitration with the American Arbitration Association requesting Cuyahoga County, Ohio as the location for the arbitration pursuant to a provision of the subcontract which required arbitration proceedings to be brought in Cuyahoga County, Ohio.

Upon review, the Court agreed with F&W that the subcontract required the dispute to be submitted to arbitration, but held that such arbitration must be held in New York. The Court based its ruling on General Business Law § 757, stating that “[a] provision…in…a construction contract, with the exception of a contract with a material supplier, that makes the contract subject to the laws of another state or that requires any litigation, arbitration or other dispute resolution proceeding arising from the contract to be conducted in another state shall be void and unenforceable.” (emphasis added).

The Court also rejected F&W’s argument that performance of the project occurred across state lines, and therefore the Federal Arbitration Act (FAA) applied and not General Business Law § 757. The Court recognized that HVS was a local company, performed all of its work in New York, and obtained most of the materials from local suppliers. Further, all of the project suppliers were present in New York, and all of the meetings concerning the project were held at the project site.

Although contractors and subcontractors in both Ohio and New York can rest easy that they are protected from onerous forum-selection clauses of by provisions of Section 4113.62 and General Business Law § 757, other business owners do not enjoy such security. This is why it is imperative that all Ohio business owners consult with experienced legal counsel during the consideration and negotiation of their contractual agreements. For questions regarding forum-selection clauses, general contractual provisions, or any other aspect of Ohio construction or business law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or tharpst@harpstross.com or nhorrigan@harpstross.com.

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